KARACHI: The State Bank of Pakistan (SBP) on Monday kept the interest rate unchanged at 22 per cent, indicating that it still feels time is not ripe for a reduction as inflationary pressure refuses to go away.

The Monetary Policy Committee (MPC) of the central bank issued the statement with reasons for no change in the interest rate that was expected by a large segment of stakeholders of the economy. This was the sixth consecutive monetary policy meeting that kept the rate unchanged at 22pc.

“The committee observed that despite the sharp deceleration in February, the level of inflation remains high and its outlook is susceptible to risks amidst elevated inflation expectations,” said the SBP.

This warrants a cautious approach and requires continuity of the current monetary stance to bring inflation down to the target range of 5-7pc by Sept 2025, it added.

The policymakers advocating for 22pc interest rate have so far been failed to counter the inflation. However, they compromised the economic growth which contracted in FY23 and now inching up towards 2pc expansion in FY24.

Elevated inflation haunts policymakers expecting moderate recovery

The SBP found some ray of hopes as it noted that the latest data continues to depict moderate pick-up in economic activity, led by rebound in agriculture output. The external current account balance is turning out better than anticipated and has helped maintain foreign exchange buffers despite weak financial inflows, it said, adding that while inflation expectations of businesses have shown a steady increase since December and those for consumers have also inched up in March.

The adjustments in administered energy prices have continued to contribute to inflation directly and indirectly, it added.

“Amidst uncertainty regarding the inflation outlook, key central banks in both advanced and emerging economies have continued to maintain a cautious monetary policy stance in recent meetings,” said the SBP.

The SBP said the agriculture sector is the key driver for the economic growth that could be growing at 2pc to 3pc in FY24.

Despite a 0.5pc slump in Large-Scale Manufacturing, the SBP expects it to recover in the coming months. It also expects gradual recovery of services sector.

The current account deficit (CAD) narrowed 71pc due to increase in exports and a decline in imports in the first seven months of FY24, said the SBP.

The primary surplus improved to 1.7pc of GDP in the first half from 1.1pc in the same period last year, while the overall fiscal deficit deteriorated to 2.3pc from 2pc in 1HFY23, said the SBP.

Sizeable increase in interest payments amidst high debt levels and growing reliance on costly domestic financing led to an expansion in the overall deficit, the SBP noted.

It estimates that the CAD is likely to remain closer to the lower bound of 0.5 to 1.5pc of GDP range for FY24, which will support the FX reserves position.

“Any further adjustments in administered prices or fiscal measures that may push prices up pose risk to the near and medium-term inflation outlook,” said the SBP. “Cognizant of these risks, the MPC assessed that it is prudent to continue with the current monetary policy stance at this stage,” it added.

Published in Dawn, March 19th, 2024